APRIL 8, 2002

The collapse of Kirch

THE Kirch media empire, which declared itself insolvent on Monday, is the owner of the commercial rights to Formula 1 racing. What happens now is going to be interesting as a court administrator will have to decide what to do with the F1 stake which Kirch owns via the SLEC holding company. Kirch owns around 58% of SLEC and should own another 17% but this has not been paid for and so remains with the troubled EM.TV company. There is believed to be an agreement by which EM.TV can only sell the shares to Kirch, so in effect they are owned by Kirch even if money has not changed hands. The remaining 25% of SLEC is owned by the Ecclestone Family and as part of the deal the Formula One group of companies (the use of One rather than 1 is an important difference given issues of trademarking) remains under the management control of Bernie Ecclestone until the end of 2005.

The problem is that unless the Formula One group can reach agreement with the F1 teams the commercial rights deal is worthless after the end of the current Concorde Agreement in 2007. The major F1 teams and car manufacturers are saying that they will start their own World Championship in 2008. It is possible that Formula One might try to stage an alternative series but without the big names like Ferrari and McLaren it is hard to see how that will be successful. A split would also be disastrous for the business, as highlighted by the meltdown of US open-wheeler racing as a result of the CART-IRL divide.

Bernie Ecclestone has spent many years building up F1 and will not wish to see it destroyed and so the only logical course of action is to try to find a solution involving the teams, the FIA and the Formula One group. Given the tensions that exist this is not going to be easy.

Ecclestone may see what sort of price can be found from the administrator to buy back the shares in SLEC owed by Kirch and he may then go out and find a new investor to fund the purchase but it is going to be a hard sell given the situation with the teams. While pressure can be brought to bear on a lot of the teams the increasing influence of the motor manufacturers cannot be overlooked and it would be unwise for the sport to try to drive these companies out of the sport as the disappearance of tobacco money is going to leave the sport more dependent than ever on the car makers.

Formula 1 is at least protected from the collapse of Kirch to some extent. The revenues generated for F1 from Kirch from the pay-TV in Germany will disappear and that will have an effect on the funding of the teams but the money from TV revenues is only around 10% of the average F1 team budget and so it will not be disastrous. Some of the bigger German football clubs are expected to go out of business because of the loss of Kirch money.

With 9500 jobs in Germany, there is pressure on politicians (in this election year) to save as much as possible of Kirch without the empire being broken up, particularly in the light of an oft-stated demand that the German TV stations remain under German control.